After significant consultation, the Corporate Governance Council of the ASX (CGC) has published the fourth version of the Principles and Recommendations (Fourth Edition).
In May 2018, the CGC issued draft amendments to the third addition of its Principles and Recommendations which proposed, among other things, broad changes regarding culture and values (Consultation Draft).
The Consultation Draft contained the polarising concept of a “social licence to operate”, which was hotly debated during the consultation period and formed the basis for the bulk of the submissions. While the CGC seems to have listened to the criticisms regarding the phrase itself, it has not backed away from the concept of listed entities being required to preserve and protect their reputation and standing in the community and with key stakeholders, such as customers, employees, suppliers, creditors, law makers and regulators. In its “Communique” regarding the Fourth Edition, the CGC made it clear that it considers the terms “social licence to operate” and “reputation” and “standing in the community” as synonymous, and that the changes were needed to “help arrest the loss of trust in business”.
The changes in the Fourth Edition are consistent with the findings of the Hayne Royal Commission, providing further evidence of a need for Australian listed companies to ensure that they do not to pursue profits to the detriment of their ethical responsibilities to stakeholders and the community at large, or their reputations.
Other significant changes to those proposed in the Consultation Draft include the removal of a proposed recommendation which dealt with approval for, and disclosure of, agreements for the provision of consultancy services by listed entities directors, senior executives or related parties. In addition, some of the more prescriptive language proposed in the commentary has been removed to reinforce the fact that Principles and Recommendations are principles based and not mandatory. In particular, some of the commentary has been pared back, including:
1.the structure and composition of Boards and Board skills matrices;
2.the culture and values of the listed entity;
3.reporting requirements and risk management processes;
Other notable changes from the third edition include imposing measurable diversity targets (including at least 30% board representation of each gender for S&P/ASX300 entities), and the recognition and management of risk (including environmental risk, and in particular climate change risk).
While listed companies will not be required to report against the Principles and Recommendations until their first full financial year commencing after January 2020, it will be important in the lead-up to their implementation for listed companies to familiarise themselves with the proposed changes, and to design and implement new systems to be put in place to comply with the changes set out in Fourth Edition (should they choose to comply rather than report against them).